Korea and Samsung Electronics Drawn to the 'Nutcracker Machine' [Seungseop Song's Financial Light]

Japan Leads, China Chases... Turbulent 1990s
Major Powers' Hegemony Struggle Turns into Another 'Nutcracker' Situation

What nickname is given to Korea and our semiconductor companies? It is probably "Nut Cracker." Although it might sound unfamiliar since it's not a term used in everyday life, it is not a difficult economic term. It literally means a machine (cracker) that cracks hard walnuts (nut). How did the walnut cracker become our nickname?

The term Nut Cracker refers to a situation where, compared to early leaders, there is a lag in technological competitiveness, and compared to latecomers, there is a disadvantage in price competitiveness. Being stuck in this in-between position naturally subjects one to strong pressure from both early and late competitors, leading to collapse. It's like a hard walnut that breaks when pressed strongly with a nutcracker.

The 1990s When Japan Was Ahead and China Was Catching Up

The published report "Korea's Economic Leap Forward into the 21st Century" released in 1997 by the famous American consulting firm Booz Allen & Hamilton.

The nickname Nut Cracker was first given to Korea in 1997, just before the International Monetary Fund (IMF) crisis broke out. A famous American consulting firm, Booz Allen & Hamilton, released a report analyzing Korea. The title was "Korea's Economic Leap Toward the 21st Century." The report pointed out that the miracle of the Korean economy had ended at that time. In particular, it attracted attention by stating that Korea had become "a walnut caught in a nutcracker" between China, boasting low prices, and Japan, proud of superior technology.

At that time, China was rapidly growing by leveraging cheap labor and exchange rate policies. According to the World Bank, China's growth rate, which was 9.3% in 1991, jumped to 14.3% in 1992, 13.9% in 1993, and 13.1% in 1994. In 1994, the Chinese government adopted a socialist market economy and devalued the yuan by 33% to 8.7 yuan per dollar. As a result, Chinese companies' export competitiveness strengthened, flooding the global market with inexpensive Chinese products.

In the 1990s, Japan's technological prowess was undoubtedly the strongest in the world. In 1980, the leader in memory semiconductor DRAM was the American company Intel, but Japanese companies overtook it. Looking at the semiconductor market rankings in 1989, the top three semiconductor companies were NEC, Toshiba, and Hitachi?all Japanese companies. In 1990, six of the top ten global corporations were Japanese.

Given this situation, the report issued a chilling warning. If Korea could not escape the nutcracker, it could fall to a second-tier country. It argued that Korea needed to drastically reform its economic structure, government roles, and foreign relations to survive. The report also proposed solutions such as abandoning decision-making practices that favored specific companies or industries, achieving financial liberalization, dismantling the Ministry of Finance and Economy, advancing capital markets, and implementing labor reforms.

Once Again a 'Nut Cracker' Situation Amid Major Powers' Hegemony Competition

A researcher at the Korea Institute of Science and Technology (KIST) in Seongbuk-gu, Seoul, is showcasing an 8-inch semiconductor wafer produced through collaborative research with the Nano Convergence Technology Institute (NNFC). Photo by Jinhyung Kang aymsdream@

As a result, Korea overcame the nutcracker crisis. Semiconductor companies like Samsung Electronics and SK Hynix seized technological hegemony and achieved rapid development in advanced fields such as IT. Contrary to concerns, prices became cheaper than Japan's, and technology surpassed China's. This led to the term "reverse nutcracker" phenomenon.

However, recent analyses suggest that the nutcracker crisis has returned. Once again, the target is semiconductor companies. Currently, competition among companies is accelerating, centered on foundries. The United States and China are fiercely competing for semiconductor hegemony. In the past, Korean semiconductor companies could survive by developing technology and lowering prices, but now they must also confront the "country-first" policies of major powers.

Vice Chairman Lee Jae-yong of Samsung Electronics shaking hands with U.S. President Joe Biden, who made his first visit to Korea since taking office in May 2022.
[Image source=Yonhap News]

The United States is openly supporting its domestic semiconductor companies. The "CHIPS Act," enacted last year, is a representative example. It provides $52.7 billion in production subsidies and research and development (R&D) support over five years to companies building semiconductor factories in the U.S. China's semiconductor rise is also formidable. China has launched the third Semiconductor Industry Development Fund, expected to exceed 35 trillion won in scale. Japan supported Taiwan's TSMC, which built a factory in Japan, with 476 billion yen, and the European Union (EU) plans to invest 43 billion euros (62 trillion won) from public and private sectors by 2030.

As subsidy competition among countries intensifies, semiconductor company executives requested the Minister of Trade, Industry and Energy, Ahn Duk-geun, at a meeting on the 26th of last month to establish investment subsidies. Korea is focusing only on indirect support such as tax cuts and infrastructure support rather than direct subsidies. In response, the government held the 5th National Advanced Strategic Industry Committee chaired by Prime Minister Han Duck-soo on the 27th and announced it would consider introducing additional investment incentives.

Editor's NoteEconomics and finance are difficult because of complex terms and backstories. Financial Light delivers easy-to-understand economic and financial stories every week. Even without any prior knowledge, these stories flow smoothly to ignite your interest in economics and finance.